You assume a future, constant growth rate for dividends of 6% and D0 = $1.20. If you require a rate of return of 12%, the intrinsic value is

Question

Quizplus · Accepted Answer

We can use the dividend discount model to calculate the intrinsic value. 
Intrinsic value = Annual dividend / (Required rate of return - Dividend growth rate)
Given that the annual dividend is $1.20, the required rate of return is 12%, and the dividend growth rate is 7%, we have:
Intrinsic value = $1.20 / (0.12 - 0.07) = $24
However, this is the value assuming a perpetual growth rate of 7%, which may not be sustainable. If we assume a more conservative growth rate of 4%, we have:
Intrinsic value = $1.20 / (0.12 - 0.04) = $21.20 
Therefore, the best choice is C.

You Assume a Future, Constant Growth Rate for Dividends of 6